A New Twist in iHeartMedia’s Debt Struggles

Justin Timberlake, right, accepting the song of the year award at the 2017 iHeartRadio Music Awards in Inglewood, Calif.CreditChristopher Polk/Getty Images for iHeartMedia

By Stephen J. Lubben

March 24, 2017

In a restructuring world dominated by oil and gas companies on the one hand and retail on the other, iHeartMedia stands out.

But if we dig a bit deeper, the San Antonio-based radio and billboard company shares some similarities with those other companies buffeted by recent economic trends.

Last week, iHeart announced that it had commenced an exchange offer targeted at all of the company’s outstanding term loans, along with various other notes, totaling about $14.6 billion in debt. Earlier this year, iHeart exchanged $476 million of senior unsecured notes due in 2018 for a like amount of senior secured notes due in 2021.

That maturity extension was simple compared with the current exchange offer.

Under the new offer, iHeart is offering various packages to creditors, depending on the degree of creditor participation. For example, the company’s term loan lenders will be offered a range of $750 to $880 of new term loans for every $1,000 of old term loans they tender.

If most lenders participate in the exchange offer, the lenders will also receive class B common stock in another subsidiary and warrants to purchase iHeartMedia’s own class D common stock. Yes, that’s right: class D.

Oh, and if at least half of the term loan holders participate, all of the existing term loans will be amended to remove the lender’s ability to renegotiate the debt if its accountants question the company’s ability to continue as a going concern. How’s that for providing some high-powered incentives to tender into the exchange offer?

Covenant Review, an independent credit research firm, complains that these term lenders are also being used to impose onerous terms on the noteholders in their part of the exchange offer.

As is often the case, certain iHeart noteholders are being asked to remove the covenants from their old notes as they exchange those notes for new ones under the exchange offer.

This provides a strong incentive for noteholders to tender into the exchange, since “holding out” in the old notes means being left with notes that provide very little protection for the noteholder.

Such consent solicitations have been used in the United States since the 1980s, although some recent case law in Britain has frowned on aggressive use of “exit consents.”

IHeart apparently has no concerns about that case law, being foreign and whatnot. Instead, Covenant Review notes that the exchange offer proposes to briefly swap term loan lenders into the old notes — where they will then consent to the noteholder’s exchange offer — before finally receiving their promised recovery under the term loan exchange offer.

So the term loan lenders will be also noteholders for a nanosecond, and during that time they will help tip the noteholder vote in favor of the exchange offer and stripping out the covenants.

And here we begin to see how iHeart is like many other recent restructuring cases. IHeart was taken private by Bain Capital and Thomas H. Lee Partners in a leveraged buyout in 2008.

Like the buyouts of Dynegy and Caesars and myriad other cases, this is one more attempt by private equity owners to salvage their interest in a company, despite past promises to creditors.

IHeart owns about 90 percent of the publicly traded Clear Channel Outdoor Holdings, the large billboard company. As explained in a Fitch rating note, a further incentive for the debt exchange offer provides that if debtholders participate in a sufficiently high level, they will receive 49 percent of iHeart’s stake in Clear Channel.

And the rest? That would be going to the existing shareholders. The reason for playing hardball with the noteholders becomes a bit clearer.

In a bankruptcy case, these shareholders would get to keep nothing until all creditors were paid in full. This new exchange offer is as much about equity salvage as debt restructuring.

Stephen J. Lubben holds the Harvey Washington Wiley Chair in corporate governance and business ethics at Seton Hall Law School and is an expert on bankruptcy.

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